UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý ☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~September~~	June 30, ~~2017~~2020

	or

o ☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____
	Commission File Number:	0-12183

~~BOVIE~~APYX MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		11-2644611
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~4 Manhattanville~~5115 Ulmerton Road, ~~Suite 106, Purchase, NY 10577~~Clearwater, FL33760

(Address of principal executive offices, zip code)

~~(914) 468-4009~~(727) 384-2323

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12 (b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	APYX	Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ~~Yes:~~ ýYes: ☒ No o☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ~~Yes:~~ ýYes: ☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange ~~Act (Check one):~~Act.



Large accelerated filer	o☐		Accelerated filer	o☒
Non-accelerated filer	o☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company	ý☒
			Emerging growth company	o☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.				o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o☐ No ý☒

As of ~~October 30, 2017, 32,860,785~~August 6, 2020, 34,216,349 shares of the registrant’s $0.001 par value common stock were outstanding.

Table of Contents

~~BOVIE~~APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended ~~September~~June 30, ~~2017~~2020

(Unaudited)



		Page
Part I.	Financial Information	23

Item 1.	Financial Statements	2
	~~Consolidated Balance Sheets at September 30, 2017 and December 31, 2016~~	2
	~~Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016~~	3
	Consolidated ~~Statement~~Balance Sheets at June 30, 2020 and December 31, 2019	3
	Consolidated Statements of ~~Changes in Stockholders’ Equity~~Operations for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	4
	Consolidated Statements of ~~Cash Flows~~Changes in Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements	67

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1618
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	26

Part II.	Other Information	2728

Item 1.	Legal Proceedings	2728
Item 1A.	Risk Factors	2728
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2729
Item 3.	Defaults Upon Senior Securities	2729
Item 4.	Mine Safety Disclosures	27
~~Item 5.~~	~~Other Information~~	27
~~Item 6.~~	~~Exhibits~~	28
	~~Signatures~~	29

Table of Contents

APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q



Item 5.	Other Information	29
Item 6.	Exhibits	30
	Signatures	31

Table of Contents

~~BOVIE~~APYX MEDICAL CORPORATION

PART I. Financial Information

ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(In thousands, except share ~~and per share~~ data, Unaudited)

September 30,
2017 December 31,
2016
ASSETS
Current assets:
Cash and cash equivalents $ 9,411
$ 14,456
Restricted cash 779
779
Trade accounts receivable, net of allowance of $154 and $118 4,077
4,733
Inventories, net 7,335
6,158
Prepaid expenses and other current assets 634
413
Total current assets 22,236
26,539
Property and equipment, net 6,376
6,449
Brand name and trademark 1,510
1,510
Purchased technology and license rights, net 189
215
Goodwill 185
185
Deposits 84
109
Other assets 119
103
Total assets $ 30,699
$ 35,110

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,387
$ 1,606
Accrued payroll 193
419
Accrued vacation 330
404
Current portion of mortgage note payable 239
239
Accrued and other liabilities 2,657
2,604
Total current liabilities 4,806
5,272
Mortgage note payable, net of current portion 2,515
2,694
Note payable 140
140
Deferred rents 11
14
Deferred tax liability 564
564
Derivative liabilities 146
203
Total liabilities 8,182
8,887
STOCKHOLDERS' EQUITY
Series B convertible preferred stock, $0.001 par value; 3,588,139 authorized and zero issued and outstanding as of September 30, 2017 and 3,588,139 authorized and 975,639 issued and outstanding as of December 31, 2016, respectively —
1
Common stock, $0.001 par value; 75,000,000 shares authorized; 32,975,174 issued and 32,832,095 outstanding as of September 30, 2017 and 40,000,000 shares authorized; 31,002,832 issued and 30,859,753 outstanding as of December 31, 2016, respectively 33
31
Additional paid-in capital 50,156
49,625
Accumulated deficit (27,672 ) (23,434 )
Total stockholders' equity 22,517
26,223
Total liabilities and stockholders' equity $ 30,699
$ 35,110



	June 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	46,156	$	58,812
Trade accounts receivable, net of allowance of $760 and $273	6,306		7,987
Income tax receivables	6,443		426
Other receivables	1,671		1,233
Inventories, net of provision for obsolescence of $685 and $392	5,257		5,068
Prepaid expenses and other current assets	4,008		3,207
Total current assets	69,841		76,733
Property and equipment, net of accumulated depreciation and amortization of $4,702 and $4,403	6,440		6,618
Operating lease right-of-use assets	295		350
Finance lease right-of-use assets	691		653
Other assets	560		391
Total assets	$	77,827	$	84,745

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,206	$	2,438
Accrued expenses and other liabilities	6,911		9,396
Current portion of operating lease liabilities	112		108
Current portion of finance lease liabilities	266		229
Related party note payable	140		140
Total current liabilities	9,635		12,311
Long-term operating lease liabilities	177		235
Long-term finance lease liabilities	414		421
Other liabilities	765		519
Total liabilities	10,991		13,486
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,201,895 issued and outstanding as of June 30, 2020, and 34,312,527 issued and 34,169,952 outstanding as of December 31, 2019	34		34
Additional paid-in capital	58,926		56,708
Retained earnings	7,876		14,517
Total stockholders’ equity	66,836		71,259
Total liabilities and stockholders’ equity	$	77,827	$	84,745

The accompanying notes are an integral part of the consolidated financial statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2020			2019			2020			2019
Sales	$	9,347		$	10,063		$	27,535		$	27,133		$	4,296		$	6,649		$	9,293		$	12,278
Cost of sales	4,753			5,002			13,673			14,049			2,202			1,975			4,215			4,041
Gross profit	4,594			5,061			13,862			13,084			2,094			4,674			5,078			8,237
Other costs and expenses:
Research and development	610			681			2,015			1,941			975			888			1,955			1,618
Professional services	421			292			1,291			1,045			1,658			1,661			4,047			3,779
Salaries and related costs	2,080			2,192			6,783			6,492			3,439			3,510			6,750			6,998
Selling, general and administrative	2,617			2,141			7,950			6,354			2,189			3,037			5,985			5,994
Total other costs and expenses	5,728			5,306			18,039			15,832			8,261			9,096			18,737			18,389
Loss from operations	(1,134		)	(245		)	(4,177		)	(2,748		)	(6,167		)	(4,422		)	(13,659		)	(10,152		)
Interest expense, net	(36		)	(37		)	(103		)	(125		)
Change in fair value of derivative liabilities	(69		)	(683		)	57			(555		)
Total other loss, net	(105		)	(720		)	(46		)	(680		)
Interest income													7			403			223			826
Interest expense													(8		)	—			(14		)	—
Other (loss) income, net													(14		)	(200		)	412			(495		)
Total other (loss) income, net													(15		)	203			621			331
Loss before income taxes	(1,239		)	(965		)	(4,223		)	(3,428		)	(6,182		)	(4,219		)	(13,038		)	(9,821		)
Income tax expense	6			—			15			—
Income tax (benefit) expense													(1,492		)	76			(6,397		)	82
Net loss	$	(1,245	)	$	(965	)	$	(4,238	)	$	(3,428	)	$	(4,690	)	$	(4,295	)	$	(6,641	)	$	(9,903	)

Loss per share
Basic	$	(0.04	)	$	(0.04	)	$	(0.14	)	$	(0.13	)
Diluted	$	(0.04	)	$	(0.04	)	$	(0.14	)	$	(0.13	)

Weighted average number of shares outstanding - basic	31,078			27,075			30,932			27,059
Weighted average number of shares outstanding - dilutive	31,078			27,075			30,932			27,059
Earnings (loss) per Share:
Basic and diluted													$	(0.14	)	$	(0.13	)	$	(0.19	)	$	(0.30	)

The accompanying notes are an integral part of the consolidated financial statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)

Preferred Stock Common Stock
Shares Par Value Shares Par Value Additional Paid-In Capital Accumulated Deficit Total
Balance
December 31, 2015 1,976
$ 2
27,051
$ 27
$ 42,859
$ (19,484 ) $ 23,404
Options exercised —
—
31
—
119
—
119
Warrants exercised —
—
133
—
316
—
316
Stock based compensation —
—
—
—
533
—
533
Stock swap to acquire options and warrants —
—
(73 ) —
(315 ) —
(315 )
Net loss —
—
—
—
—
(3,428 ) (3,428 )
Balance
September 30, 2016 1,976
$ 2
27,142
$ 27
$ 43,512
$ (22,912 ) $ 20,629

Balance
December 31, 2016 976
$ 1
30,860
$ 31
$ 49,625
$ (23,434 ) $ 26,223
Options exercised —
—
21
—
275
—
275
Conversion of Series B convertible preferred to common stock (976 ) (1 ) 1,951
2
(1 ) —
—
Stock based compensation —
—
—
—
532
—
532
Stock swap to acquire options and warrants —
—
—
—
(275 ) —
(275 )
Net loss —
—
—
—
—
(4,238 ) (4,238 )
Balance
September 30, 2017 —
$ —
32,832
$ 33
$ 50,156
$ (27,672 ) $ 22,517



Three months ended June 30, 2019 and 2020
	Common Stock			Additional Paid-In Capital		Retained Earnings			Total
	Shares	Par Value		Additional Paid-In Capital		Retained Earnings			Total
Balance March 31, 2019	33,891	$	34	$	54,182	$	28,615		$	82,831
Options exercised for cash	11	—		48		—			48
Stock based compensation	—	—		856		—			856
Shares issued on net settlement of stock options	17	—		—		—			—
Net loss	—	—		—		(4,295		)	(4,295		)
Balance June 30, 2019	33,919	34		$	55,086	$	24,320		$	79,440

Balance March 31, 2020	34,184	$	34	$	57,829	$	12,566		$	70,429
Stock based compensation	—	—		1,097		—			1,097
Shares issued on net settlement of stock options	18	—		—		—			—
Net Loss	—	—		—		(4,690		)	(4,690		)
Balance June 30, 2020	34,202	$	34	$	58,926	$	7,876		$	66,836

Six months ended June 30, 2019 and 2020
	Common Stock			Additional Paid-In Capital		Retained Earnings			Total
	Shares	Par Value		Additional Paid-In Capital		Retained Earnings			Total
Balance December 31, 2018	33,705	$	34	$	52,920	$	34,223		$	87,177
Options exercised for cash	29	—		115		—			115
Stock based compensation	—	—		2,051		—			2,051
Shares issued on net settlement of stock options	185	—		—		—			—
Net loss	—	—		—		(9,903		)	(9,903		)
Balance June 30, 2019	33,919	$	34	$	55,086	$	24,320		$	79,440

Balance December 31, 2019	34,170	$	34	$	56,708	$	14,517		$	71,259
Options exercised for cash	10	—		72		—			72
Stock based compensation	—	—		2,146		—			2,146
Shares issued on net settlement of stock options	22	—		—		—			—
Net loss	—	—		—		(6,641		)	(6,641		)
Balance June 30, 2020	34,202	$	34	$	58,926	$	7,876		$	66,836

The accompanying notes are an integral part of the consolidated financial statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities
Net loss $ (4,238 ) $ (3,428 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 527
556
Provision for inventory obsolescence 203
365
Gain on disposal of property and equipment, net 3
19
Stock based compensation 532
533
Change in fair value of derivative liabilities (57 ) 555
Provision for allowance for doubtful accounts 128
126
Provision for deferred taxes —
25
Changes in current assets and liabilities:
Trade receivables 528
(1,070 )
Prepaid expenses (221 ) (48 )
Inventories (1,380 ) (337 )
Deposits and other assets 9
312
Accounts payable (219 ) 436
Accrued and other liabilities (250 ) (337 )
Net cash used in operating activities (4,435 ) (2,293 )
Cash flows from investing activities
Purchases of technology, property and equipment (431 ) (182 )
Net cash used in investing activities (431 ) (182 )
Cash flows from financing activities
Proceeds from stock options/warrants exercised —
119
Change in restricted cash —
60
Repayment of mortgage note payable (179 ) (180 )
Net cash used in financing activities (179 ) (1 )
Net change in cash and cash equivalents (5,045 ) (2,476 )
Cash and cash equivalents, beginning of period 14,456
11,805
Cash and cash equivalents, end of period $ 9,411
$ 9,329

Cash paid for:
Interest paid $ 103
$ 125



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net loss	$	(6,641	)	$	(9,903	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	439			316
Provision for inventory obsolescence	413			36
Stock based compensation	2,146			2,051
Unrealized gain on short term investments	—			(164		)
Provision (benefit) for allowance for doubtful accounts	486			(238		)
Changes in operating assets and liabilities:
Trade receivables	1,195			(1,333		)
Prepaid expenses and other assets	(7,427		)	(879		)
Inventories	(571		)	(1,015		)
Accounts payable	(232		)	218
Accrued and other liabilities	(2,241		)	236
Net cash used in operating activities	(12,433		)	(10,675		)
Cash flows from investing activities
Purchases of property and equipment	(184		)	(518		)
Purchases of marketable securities	—			(18,884		)
Proceeds from maturities of marketable securities	—			80,726
Net cash (used in) provided by investing activities	(184		)	61,324
Cash flows from financing activities
Proceeds from stock option exercises	72			115
Repayment of finance lease liabilities	(120		)	—
Net cash (used in) provided by financing activities	(48		)	115
Effect of exchange rates on cash	9			—
Net change in cash, cash equivalents and restricted cash	(12,656		)	50,764
Cash, cash equivalents and restricted cash, beginning of period	58,812			16,596
Cash, cash equivalents and restricted cash, end of period	$	46,156		$	67,360

Cash paid for:
Interest	$	8		$	14
Taxes	54			248

Non cash activities:
Cashless exercise of stock options	$	49		$	757
Right-of-use assets capitalized and lease liabilities recognized upon adoption of Topic 842	—			212
Right-of-use assets capitalized and lease liabilities recognized upon lease remeasurement	—			207
Right-of-use assets capitalized and lease liabilities recognized upon execution of lease	150			—
Transfer of other assets to fixed assets	—			42
Transfer of inventory (to) from fixed assets	(34		)	262

The accompanying notes are an integral part of the consolidated financial statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

Unless the context otherwise indicates, the terms “Company,” “we,” “our,” “us,” ~~“Bovie,~~“Apyx,” and similar terms refer to ~~Bovie~~Apyx Medical Corporation and its consolidated subsidiaries.

We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

In March 2020, the World Health Organization recognized the novel strain of coronavirus ("COVID-19"), as a pandemic. This pandemic has severely restricted the level of economic activity around the world. In response, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. The long-term impact of the COVID-19 pandemic on our business continues to be highly uncertain and difficult to predict as the environment created by the pandemic is rapidly changing. Starting in late February, the effects of the pandemic have been material and adverse on our business. While we experienced positive indications in our business late in the second quarter, we continue to expect that the severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers and suppliers, all of which are uncertain and cannot be predicted.

Most of the procedures performed using our Helium Plasma Technology are elective, and as a result many of our customers have been affected by the actions taken by various governmental authorities requiring non-essential businesses to shut down temporarily. As these shut-downs have begun to be reversed, we have started to see an increase in demand for elective cosmetic and plastic surgery procedures, resulting in higher than expected revenues in our Advanced Energy segment. In international markets, a greater portion of these procedures are performed in a hospital, and it is less certain when elective procedures will fully return to normal.. While we started to experience a significant decline in sales towards the end of our first fiscal quarter, we began to see an increase in sales towards the end of our second fiscal quarter as local jurisdictions started to re-open. However, the full extent to which the COVID-19 pandemic may materially and adversely impact the Company's future financial position, liquidity, or results of operations remains uncertain. While we began to experience an improvement in sales, domestically and internationally, towards the end of our second fiscal quarter, the pace at which this continues into the third quarter and beyond is still highly uncertain.

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019. These consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

In the first quarter of 2017, the Company adopted a change in presentation on its Consolidated Statements of Cash Flows in order to present a "Provision for allowance for doubtful accounts". Previously reported information has been modified to conform to this new presentation.

~~NOTE 2. INVENTORIES~~

Inventories are stated at the lower of cost or market. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon labor hours.

~~Inventories consisted of the following:~~

(In thousands) September 30,
2017 December 31,
2016
Raw materials $ 5,145
$ 4,521
Finished goods 3,804
3,048
Gross inventories 8,949
7,569
Less: reserve for obsolescence (1,614 ) (1,411 )
Net inventories $ 7,335
$ 6,158

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE ~~3. INTANGIBLE ASSETS~~ 2. CHANGE IN ACCOUNTING POLICY

~~Intangible assets consisted~~During 2019, we began granting stock option awards deeper within the organization. We do not have sufficient experience with grants to these employees and we have experienced challenges in developing reliable forfeiture estimates at the grant date. Accounting for revising the forfeiture estimates has been burdensome. Accounting Standards Codification 718, Compensation-Stock Compensation, prescribes two methods for accounting for forfeitures on stock option awards, either the estimation method utilized by the Company previously, or by accounting for forfeitures as they occur. On January 1, 2020 we made an accounting policy election change and began accounting for forfeitures on stock option awards using actual forfeitures. This accounting policy election change was made on a retrospective basis. However, the changes to the current and prior periods were determined to be immaterial and there have been no changes to previously reported results as a result of the ~~following:~~

(In thousands) September 30,
2017 December 31,
2016
Brand name and trademark (life indefinite) $ 1,510
$ 1,510

Purchased technology (5-17 year lives) $ 1,496
$ 1,441
Less: accumulated amortization (1,307 ) (1,226 )
Purchased technology, net $ 189
$ 215

Goodwill $ 185
$ 185

With respect to our trademark and brand name, we continue to market products, release new products and product extensions and maintain and promote these trademarks and brand name in the marketplace through legal registration and such methods as advertising, medical education and trade shows. It is our belief that these trademarks and brand names will generate cash flow for an indefinite period of time. Therefore, we believe our trademarks and brand name intangible assets are not impaired. Goodwill resulted from our acquisition of Bovie Bulgaria, EOOD.

Amortization of intangible assets was $27,000 and $81,000 for the three and nine months ended September 30, 2017, respectively, as compared with $27,000 and $81,000 for the three and nine months ended September 30, 2016. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of operations.

change.

NOTE 4.3. RECENT ACCOUNTING PRONOUNCEMENTS

In ~~January 2017,~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, contract assets, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update, as originally issued, was effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The Company currently expects to continue to qualify as a Smaller Reporting Company, based upon the current SEC definition, and as a result, will be utilizing the deferred elective date. While we are in the process of determining the effects of the adoption of the standard on the consolidated financial statements, we do not expect the impact to be material.

In January 2017, the FASB issued ASU 2017-04,Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting ~~unit's~~unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. ~~Early adoption is permitted, however we have chosen not to do so.~~The Company adopted the ASU on January 1, 2020. The amendment isdid not ~~expected to~~ have ~~a material~~an impact on our consolidated financial condition or results of operations.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~. The new guidance clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, however we have chosen not to do so. The amendment is not expected to have a material impact on our financial condition or results of operations.

~~In March 2016, FASB issued ASU No. 2016-09~~ ~~Compensation-Stock Compensation - (Topic 718)~~ Improvements to employee share-based payments accounting as part of simplicity initiatives. This update involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For us, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The amendment has not made a material impact on our financial condition or results of operations.

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~In February 2016, FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.

~~In May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers~~, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2018. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We performed an analysis and concluded that the amendment will not have a material impact on our financial condition or results of operations.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.

~~NOTE 5. FAIR VALUE MEASUREMENTS~~

~~Certain assets and liabilities that are measured at fair value on a recurring basis are measured in accordance with FASB ASC Topic 820-10-05,~~ ~~Fair Value Measurements~~. FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.

~~The statement requires fair value measurement be classified and disclosed in one of the following three categories:~~

~~Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;~~

~~Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and~~

~~Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).~~

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~The following represents~~NOTE 4. INVENTORIES

Inventories are stated at the lower of cost or net realizable values. Cost is determined on a ~~reconciliation~~first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are primarily allocated to inventory manufactured in-house based upon labor hours.

Inventories consisted of the ~~changes~~following:



(In thousands)	June 30, 2020			December 31, 2019
Raw materials	$	2,441		$	2,935
Work in process	1,504			1,209
Finished goods	1,997			1,316
Gross inventories	5,942			5,460
Less: provision for obsolescence	(685		)	(392		)
Inventories, net	$	5,257		$	5,068

During the second fiscal quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs and earlier than expected completion of product registrations in ~~fair~~some of our foreign markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. The total associated impairment was approximately $400,000 and is included in cost of ~~warrants measured at fair value using Level 3 inputs during~~sales in the ~~nine~~accompanying consolidated statements of income for the three and six months ended ~~September~~June 30, ~~2017:~~ 2020.

(in thousands)
2013
Placement Agent Warrants
Balance, December 31, 2016 $ 203
Change in fair value (57 )
Balance, September 30, 2017 ⁽¹⁾
$ 146

~~(1)~~

The warrants are valued using a trinomial lattice valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the model at September 30, 2017 included the market price of our common stock, an expected dividend yield of zero, the remaining period to the expiration date of the warrants, expected volatility of our common stock over the remaining life of the warrants of 2.0 years, estimated based on a review of our historical volatility of 60.290% and risk-free rates of return of 1.380% for the 2013 warrants based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the warrants. We also take into consideration a probability assumption for anti-dilution.

NOTE 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILTIES

Accrued expenses and other current liabilities consisted of the following:



(in thousands)	June 30, 2020		December 31, 2019
Accrued payroll	726		694
Accrued bonuses	—		1,306
Accrued commissions	531		877
Accrued product warranties	439		452
Accrued insurance	626		1,170
Accrued professional fees	1,043		1,383
Joint and several payroll liability	1,045		1,045
Uncertain tax positions	1,573		1,491
Other accrued expenses and current liabilities	928		978
Total accrued expenses and other current liabilities	$	6,911	$	9,396

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 6. EARNINGS PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting ~~period.~~period adjusted for other units required to be included in basic EPS. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. As we are in a net loss position for all periods presented, all potential shares outstanding are anti-dilutive. The following table provides the computation of basic and diluted earnings per share.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2020			2019			2020			2019
Numerator:
Net loss	$	(4,690	)	$	(4,295	)	$	(6,641	)	$	(9,903	)

Denominator:
Weighted average shares outstanding - basic and diluted	34,186			33,384			34,181			33,363

Earnings (loss) per share:
Basic and diluted	$	(0.14	)	$	(0.13	)	$	(0.19	)	$	(0.30	)

Anti-dilutive instruments excluded from diluted loss per common share:
Options	4,986			1,882			4,986			1,882

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands, except per share data) 2017 2016 2017 2016
Numerator:
Net loss available to common shareholders $ (1,245 ) $ (965 ) $ (4,238 ) $ (3,428 )
Effect of dilutive securities:
Derivative liability - warrants —
—
—
—
Numerator for dilutive loss per common share $ (1,245 ) $ (965 ) $ (4,238 ) $ (3,428 )

Denominator:
Weighted average shares used to compute basic loss per common share 31,078
27,075
30,932
27,059
Effect of dilutive securities:
Derivative liability - warrants —
—
—
—
Denominator for dilutive loss per common share 31,078
27,075
30,932
27,059

Basic loss per common share $ (0.04 ) $ (0.04 ) $ (0.14 ) $ (0.13 )
Diluted loss per common share $ (0.04 ) $ (0.04 ) $ (0.14 ) $ (0.13 )

910

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 7. STOCK-BASED COMPENSATION

Under our stock option plans, our board of directors may grant restricted stock and options to purchase common shares to our ~~key~~ employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with ~~option~~stock-based compensation expense amortized over the vesting period based on the ~~trinomial lattice option-pricing model~~ fair value on the grant date utilizing a trinomial lattice model through 2018 and the Black Scholes model for grants in 2019 and 2020, both of which ~~includes~~include a number of estimates that affect the amount of our expense.

We ~~expensed~~recognized approximately ~~$191,000~~$1,097,000 and ~~$532,000~~$2,146,000, respectively, in stock-based compensation expense during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively,~~2020, as compared with ~~$173,000~~$856,000 and ~~$533,000~~$2,051,000, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019.

The status of our stock options ~~and stock awards~~ are summarized as follows:



	Number of options		Weighted average exercise price
Outstanding at December 31, 2019	3,966,858		$	4.67
Granted	1,274,900		8.18
Exercised	(44,381	)	3.23
Canceled and forfeited	(211,433	)	7.51
Outstanding at June 30, 2020	4,985,944		$	5.46

Number of options Weighted average exercise price
Outstanding at December 31, 2016 3,752,209
$ 3.04
Granted 628,000
3.26
Exercised (104,500 ) 2.64
Canceled and forfeited (196,803 ) 4.99
Outstanding at September 30, 2017 4,078,906
$ 2.99

We allow stock option holders to exercise stock-based awards by surrendering stock-based awards with a fair value of the stock-based awards exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended June 30, 2020 and 2019, respectively, we received 11,085 and 7,779 options as payment in the exercise of 17,665 and 17,221 options. For the six months ended June 30, 2020 and 2019, respectively, we received 13,009 and 91,598 options as payment in the exercise of 22,027 and 185,951 options.

Common shares required to be issued upon the exercise of stock options ~~and warrants~~ would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a ~~trinomial lattice~~Black Scholes model with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.



	2020 Grants
Option value	$8.18
Risk-free rate	1.7%
Expected dividend yield	—
Expected volatility	65.9%
Expected term (in years)	6

2017 Grants
Option value $ 1.73
- $ 2.34
Risk-free rate 1.5%
Expected dividend yield —%
Expected volatility 68.0%
Expected term (in years) 6

NOTE 8. INCOME TAXES

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The Company's income tax expense was $6,000 with an effective tax rate of 0.0% and $15,000 with an effective tax rate of 0.0% for the three and nine months ended September 30, 2017, respectively, as comparedCARES Act includes a provision that allows companies to ~~$0 with an effective tax rate of 0.0% for both the three and nine months ended September 30, 2016. The Company's effective tax rate differs from the statutory rate primarily due to the change~~carryback net operating losses (NOL’s) generated in the ~~valuation allowance on~~period 2018 through 2020 to prior years. In conjunction with the ~~Company's~~disposition of the Core business in 2018, we generated a significant amount of taxable income in 2018. Subsequent to this, we generated net ~~deferred tax assets with a finite life.~~

~~As a result~~losses in 2019 and through the first half of ~~historical~~2020. For the net losses ~~the Company~~generated in 2019, we previously recorded a valuation allowance on the ~~net~~full value of the deferred tax ~~asset~~assets associated with ~~a finite life~~our NOL carryforwards due to realization of the NOL being improbable under then existing tax law. The CARES Act makes these assets realizable, and ~~does not anticipate recording~~as of the date of the CARES Act, we have recognized an income tax benefit ~~related to these deferred tax assets. The Company will reassess~~of approximately $3.7 million associated with the ~~realization~~release of ~~deferred tax assets each reporting period and will be able to reduce~~ the valuation allowance ~~to the extent that the financial results of these operations improve and it becomes more likely than not that the deferred tax assets are realizable.~~

~~For the nine months ended September 30, 2017, we do not believe we had any significant uncertain tax positions nor did we have any interest or penalties~~on our Federal NOL carryforward related to ~~any significant uncertain tax positions.~~

~~The Company is subject to U.S. federal~~2019. We also recognized income tax ~~state income tax and Bulgarian income tax. Until the respective statutes~~benefits of ~~limitations expire (which may be as much as 20 years while we have unused NOL's), we are subject to income tax audits in the jurisdictions in which we operate.~~

1011

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~NOTE 9. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS~~

~~Property~~approximately $1.5 million and ~~Rental Agreements~~

~~In March 2014, we signed a lease for offices located in Purchase, New York. The lease is for 3,650 square feet of office space with a monthly cost of approximately $13,916 per month~~$1.2 million, related to our net loss before income taxes for the ~~lease expiring in~~three and six months ended June 30, 2020, respectively. There are approximately an additional $3.2 million of 2018 Federal income tax payments available to offset against any other 2020 losses that may be incurred.

Our income tax (benefit) expense was approximately $(1,492,000) and $76,000 with an effective tax rate of 24.1% and (1.8)% for the three months ended June 30, 2020 and 2019, respectively. Our income tax (benefit) expense was approximately $(6,397,000) and $82,000 with an effective tax rate of 49.1% and (0.8)% for the six months ended June 30, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019.

In October 2015, pursuant to our acquisition of Bovie Bulgaria, we are obligated to pay a lease of $5,114 per month, expiring in December 2021, for 18,745 square feet of office, research and manufacturing space in Sofia, Bulgaria.

The following is a ~~schedule~~roll-forward of ~~approximate future minimum lease payments under operating leases as~~the Company's total gross unrecognized tax benefits, not including interest and penalties, for the period ended June 30, 2020.



(in thousands)	Gross Unrealized Tax Benefits
Balance at January 1, 2020	$	1,313
Additions of tax positions related to the current year	—
Additions of tax positions related to the prior year	—
Decreases for tax positions related to the prior year	—
Balance at June 30, 2020	$	1,313

We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in our condensed consolidated financial statements. As of ~~September~~June 30, ~~2017:~~

(In thousands)
2017 (remaining three months)
$ 47
2018 189
2019 132
2020 73
2021 73
Total $ 514

~~Rent expense was~~2020, we had approximately ~~$41,385~~$260,000 in accrued interest and ~~$126,711~~penalties related to unrecognized tax benefits. Included in the income tax benefit for the three months and ~~nine months~~six ended ~~September~~June 30, ~~2017,~~2020, respectively ~~compared~~are approximately $43,000 and $82,000 of interest and penalties on the Company's uncertain tax positions. If the Company were to ~~$57,720~~prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize approximately $1,573,000 of tax benefits in the provision of income taxes. It is expected that all of the uncertain tax positions should be resolved by October 2022.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Litigation

The medical device industry is characterized by frequent claims and ~~$140,000~~litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business. Such claims may include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.

We are involved in a number of legal actions relating to the use of our Helium Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policies or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated results of operations, financial position or cash flows.

On April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the ~~three~~Middle District of Florida, against the Company and ~~nine months ended~~Charles D. Goodwin, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On September 3, 2019, lead plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. On October 3, 2019, defendants filed a motion to dismiss the Amended Complaint, and on March 11, 2020, the Court denied that motion. On July 10, 2020, the parties executed a settlement agreement, which is subject to Court approval. The Court preliminarily approved the settlement on July 21, 2020. The settlement agreement provides for the dismissal of the action with prejudice. At June 30, ~~2016.~~2020, approximately $670,000 of the $1,000,000 insurance deductible is unpaid and is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets. During July 2020, substantially all of the unpaid deductible was paid.

We accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.

Purchase Commitments

At ~~September~~June 30, ~~2017,~~2020, we had purchase commitments ~~for inventories~~ totaling approximately ~~$3.6 million,~~$500,000 substantially all of which is expected to be purchased bywithin the ~~end~~next six months.

China Joint Venture

In late 2019, we executed a joint venture agreement with our Chinese supplier. The agreement requires the Company to make a capital contribution into the newly formed entity of ~~2017.~~approximately $360,000. During July 2020, we funded approximately $150,000 of the commitment. As of the date of these consolidated financial statements, the joint venture has not commenced principal operations.

~~Concentrations~~

With respect to receivables, our ten largest customers accounted for approximately 35.3% and 41.3% of trade receivables as of September 30, 2017 and 2016, respectively, and approximately 50.0% and 56.9% of net revenues for the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.7% and 9.3% of sales, while for the same period in 2016, McKesson and National Distribution & Contracting Inc. accounted for 15.0% and 9.0% of sales.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 10. RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, ~~Bovie~~Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the ~~company~~Company working in the ~~Accounting~~accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an ~~Engineer~~engineer in the ~~Quality Assurance~~quality assurance department.

~~A relative of Moshe Citronowicz, Bovie’s Senior Vice President, is considered a related party. Arik Zoran is a consultant~~In addition, as part of the ~~Company doing business as AR Logic, Inc.,~~purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a ~~consulting firm owned by Arik Zoran, Mr. Citronowicz’s brother.~~ note payable for $140,000 to be paid 5 years after the original purchase date, which is in October 2020.

The ~~Company has been working with AR Logic since 2011 and as~~partner in our China joint venture is also a supplier of ~~April 14, 2017,~~ the ~~Company agreed to a renewal contract and terms to continue~~Company. During the ~~consulting arrangement, expiring December 31, 2017. AR Logic was paid consulting fees~~six months ended June 30, 2020, we made purchases from this supplier of approximately ~~$33,333 and $129,366 for the three and nine months ended September~~$850,000. At June 30, ~~2017, respectively compared to $81,000 and $158,000 for the three and nine months ended September 30, 2016.~~2020, we owed this supplier approximately $4,000.

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~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~NOTE 11. LONG TERM DEBT~~

On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”) wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. In addition, the Lender released as collateral to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000 of the aggregate indebtedness secured by these accounts.

The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interest in a certificate of deposit in the amount of $779,000 as additional collateral. The amount of the additional collateral required declines on a pro rata basis as principal is paid.

~~Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at September 30, 2017 was 4.732%.~~

The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity, as defined, of $750,000. Should we desire to extend the Loan beyond July 20, 2019, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0.

~~Our future contractual obligations for agreements with initial terms greater than one year are as follows:~~

(In thousands) Long-term debt
2017 (remaining three months)
$ 60
2018 239
2019 2,455
Total $ 2,754

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~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

NOTE ~~12.~~11. GEOGRAPHIC AND SEGMENT INFORMATION

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.

~~Prior to the first quarter of 2017, we disclosed only one reporting segment. Beginning in 2017, our~~Our reportable segments are disclosed as principally organized and managed as ~~three~~2 operating segments: ~~Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the growth in~~ Advanced Energy and ~~the differing behavior of the Core and OEM product lines. The Corporate~~OEM. "Corporate & ~~Other category~~Other" includes certain unallocated corporate ~~operational, research~~ and ~~development and marketing~~administrative costs which were not specifically attributed to any reportable segment. ~~Net assets are shared, therefore, not allocated to the reportable segments.~~ The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Summarized financial information with respect to reportable segments is as follows:

Three Months Ended September 30, 2017
(In thousands) Core OEM Advanced Energy Corporate (Other) Total
Sales $ 6,696
$ 525
$ 2,126
$ —
$ 9,347

Income (loss) from operations ⁽¹⁾
1,699
323
(718 ) (2,438 ) (1,134 )

Interest expense, net —
—
—
(36 ) (36 )
Change in fair value of derivative liabilities —
—
—
(69 ) (69 )
Income tax expense —
—
—
6
6
Depreciation and amortization —
—
—
171
171

Three Months Ended September 30, 2016
(In thousands) Core OEM Advanced Energy Corporate (Other) Total
Sales $ 6,902
$ 1,762
$ 1,399
$ —
$ 10,063

Income (loss) from operations 2,089
690
(707 ) (2,317 ) (245 )

Interest expense, net —
—
—
(37 ) (37 )
Change in fair value of derivative liabilities —
—
—
(683 ) (683 )
Income tax expense —
—
—
—
—
Depreciation and amortization —
—
—
201
201



	Three Months Ended June 30, 2020
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	2,867		$	1,429	$	—		$	4,296

Income (loss) from operations	(3,292		)	584		(3,459		)	(6,167		)

Interest income	—			—		7			7
Interest expense	—			—		(8		)	(8		)
Other losses, net	—			—		(14		)	(14		)
Income tax benefit	—			—		(1,492		)	(1,492		)



	Three Months Ended June 30, 2019
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	5,350		$	1,299	$	—		$	6,649

Income (loss) from operations	(968		)	136		(3,590		)	(4,422		)

Interest income	—			—		403			403
Other losses, net	—			—		(200		)	(200		)
Income tax expense	—			—		76			76



	Six Months Ended June 30, 2020
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	6,853		$	2,440	$	—		$	9,293

Income (loss) from operations	(7,276		)	831		(7,214		)	(13,659		)

Interest income	—			—		223			223
Interest expense	—			—		(14		)	(14		)
Other income, net	—			—		412			412
Income tax benefit	—			—		(6,397		)	(6,397		)

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)



	Six Months Ended June 30, 2019
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	9,721		$	2,557	$	—		$	12,278

Income (loss) from operations	(4,296		)	727		(6,583		)	(10,152		)

Interest income	—			—		826			826
Other losses, net	—			—		(495		)	(495		)
Income tax expense	—			—		82			82

Nine Months Ended September 30, 2017
(In thousands) Core OEM Advanced Energy Corporate (Other) Total
Sales $ 20,959
$ 2,030
$ 4,546
$ —
$ 27,535

Income (loss) from operations ⁽¹⁾
6,471
1,031
(3,821 ) (7,858 ) (4,177 )

Interest expense, net —
—
—
(103 ) (103 )
Change in fair value of derivative liabilities —
—
—
57
57
Income tax expense —
—
—
15
15
Depreciation and amortization —
—
—
527
527

Nine Months Ended September 30, 2016
(In thousands) Core OEM Advanced Energy Corporate (Other) Total
Sales $ 20,261
$ 4,351
$ 2,521
$ —
$ 27,133

Income (loss) from operations 5,047
2,498
(3,331 ) (6,962 ) (2,748 )

Interest expense, net —
—
—
(125 ) (125 )
Change in fair value of derivative liabilities —
—
—
(555 ) (555 )
Income tax expense —
—
—
—
—
Depreciation and amortization —
—
—
355
556

~~(1)~~

During the first and second quarter of 2017, marketing expenses were considered as attributable only to the Corporate (Other) segment in the line Income (loss) from operations. Beginning with the third quarter of 2017, it was determined that certain marketing expenses are attributable to specific segments. The disclosure of Income (loss) from operations was updated for the third quarter of 2017 to reflect marketing expense by segment.

We derive revenues from four major product lines: Electrosurgical, Cauteries, Lighting and Other products. We do not review or analyze our four major product lines below net sales. Sales for the product lines are summarized as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2017 2016 2017 2016
Sales by Product Line
Electrosurgical $ 6,205
$ 5,690
$ 17,741
$ 15,020
Cauteries 1,696
1,863
5,224
5,417
Lighting 573
740
1,966
2,046
Other 873
1,770
2,604
4,650
Total $ 9,347
$ 10,063
$ 27,535
$ 27,133

1416

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

International sales represented approximately ~~14.6%~~21.0% and ~~14.0%~~24.6% of total revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, as compared with ~~13.2%~~31.7% and ~~14.9%~~31.2% of total revenues for the ~~three and nine months ended September 30, 2016.~~ same prior year period.

Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the ~~"ship to"~~customer's “ship to” location on the invoice, are as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Sales by Domestic and International
Domestic	$	3,393	$	4,540	$	7,011	$	8,450
International	903		2,109		2,282		3,828
Total	$	4,296	$	6,649	$	9,293	$	12,278

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2017 2016 2017 2016
Sales by Domestic and International
Domestic $ 7,978
$ 8,730
$ 23,678
$ 23,102
International 1,369
1,333
3,857
4,031
Total $ 9,347
$ 10,063
$ 27,535
$ 27,133

1517

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~~BOVIE~~APYX MEDICAL CORPORATION

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~(Unaudited)

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.

Executive Level Overview

~~Bovie Medical Corporation (“Company”, “Bovie”, “we”, “us”, or “our”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at~~ ~~4 Manhattanville Road, Suite 106, Purchase, NY 10577~~.

We are an ~~energy-based medical device~~advanced energy technology company ~~specializing~~with a passion for elevating people’s lives through innovative products in ~~developing, manufacturing~~the cosmetic and ~~marketing~~surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a ~~range~~unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of ~~electrosurgical products~~precision and technologies, as well as related medical products used in doctor’s offices, surgery centers and hospitals worldwide. Our medical devices are marketed through Bovie’s own well-respected brands (Bovie^®~~, IDS™ and DERM~~^TM~~) and on a private label basis to distributors throughout the world.~~virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in ~~the design, development and manufacturing of electrosurgical equipment by producing equipment for large, well-known medical device manufacturers~~unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as ~~well~~a pandemic by the World Health Organization. The COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as ~~start-up companies with~~imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. As of the ~~need~~date of this filing, there are strong indications that these actions are beginning to subside as governmental bodies begin to loosen restrictions. However, given the variability in measures taken, the uncertainty among any potential resurgence of COVID-19, and patients willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time. As a result, there could continue to be significant adverse impacts to the results of our operations into the third fiscal quarter and possibly beyond.

Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology. Beginning in late February we began to see declines in the sale of our Helium Plasma Technology in European markets. These declines continued and also spread to the North and Latin American markets in March. Towards the end of the second quarter, we began to see improved demand for our ~~energy based designs.~~products, primarily in the US market, however the extent of this improvement remains uncertain.

We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant disruptions as a result of COVID-19. We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers. These delays have not, to date, had a significant impact on our operations.

In response to COVID-19, we have taken action in these key areas:

Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential

exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We have also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities. We have also significantly reduced business travel and access to our facilities.

Maintaining Engagement of or Sales Team and Our Customers: In addition to the initiatives we have put in place to protect health and safety for all employees, we have focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time. With

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our reps also continue to target and reach out to prospective accounts so that they will be well-positioned when the recovery occurs and surgeons return to conducting elective cosmetic procedures. Outside the U.S., we are ~~also~~closely monitoring the ~~developer~~activities of ~~J-Plasma;~~our distributor partners and helping them navigate the challenges they face as a ~~patented plasma-based surgical product for cutting, coagulation~~result of the slower demand they are seeing in their respective countries.

Operating Expenses: We continue to take preemptive steps to curtail spending, including implementing hiring restrictions,

reducing most discretionary spending, reducing capital expenditures, and ~~ablation~~delaying certain R&D projects and clinical research studies.

Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We continue to take advantage of ~~soft tissue. J-Plasma utilizes a helium ionization process~~certain provisions of the CARES Act which are applicable to produce a stable, focused beam of plasma that provides surgeons with greater precision, minimal invasiveness and an absence of conductive currents through the patient during surgery. The new J-Plasma handpieces with Cool-Coag™ technology deliver the precision of helium plasma energy, the power of traditional monopolar coagulationus including utilizing NOL carryback provisions and the ~~efficiency~~deferral of ~~plasma beam coagulation - enabling thin-layer ablation~~payroll taxes. We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and ~~dissection and fast coagulation with a single instrument, minimizing instrument exchange and allowing a surgeon~~operations.

During 2020, we continue to ~~focus on their patient and their procedures. With Cool-Coag technology, the new J-Plasma handpieces can deliver three distinctly different energy modalities - further~~drive sales in our Advanced Energy business by increasing the ~~utility~~adoption and ~~versatility of the J-Plasma system. J-Plasma has been the subject of ten white papers and has been cited therein for its clinical utility in gynecological and plastic surgery procedures.~~

~~The majority~~utilization of our ~~core products are marketed through medical distributors, which distribute to more than 6,000 hospitals,~~generators and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows.

International sales represented approximately 14.6% and 14.0% of total revenues for the three and nine months ended September 30, 2017, respectively, as compared with 13.2% and 14.9% of total revenues for the three and nine months ended September 30, 2016, respectively. The decrease in international sales as a percentage of revenue during the nine months ended September 30, 2017, was driven pending product registration in foreign jurisdictions and large international purchase tenders that did not occurhandpieces in the ~~current period as compared to the same period of 2016.~~U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than ~~150 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility. Our business is generally not seasonal in nature.~~

~~During 2017,~~50 countries. As of June 30, 2020, we ~~continued our full scale commercialization efforts for Advanced Energy technology which includes J-Plasma. We have~~had a direct sales force of 1731 field-based selling professionals and a network of 144 independent ~~manufacturing representatives, resulting in a total~~ sales ~~force of 31.~~agencies, led by 5 sales managers. This selling organization is focused on the use of ~~Advanced Energy technology, primarily J-Plasma, for operating room procedures.~~Renuvion® in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion®.

During the first two months of 2020, our plans to host new Physician Mentor Programs, or “PMPs,” and expand our presence and educational programming at industry conferences and trade shows proceeded as expected. Our events planned for March, however, were canceled due to COVID-19. In lieu of this in-person programming, our sales, marketing and field clinical teams have been very active in engaging with our customers - and prospects - around the world. We have hosted educational events virtually where we featured some of our leading clinician customers speaking on a wide range of topics, including side-by-side results comparing Renuvion® to a leading competitor technology.

Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment. We recently hosted the first installment of a planned series of webinars designed to assist our customers and prospects with opening their practices post-COVID 19. We also engaged with clinician customers outside the U.S. including hosting multiple continuing education training sessions on J-Plasma® and Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology.

Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy ~~technology.~~and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

The Company continuously reviews and refines its marketing strategies and distribution channels regarding the commercialization of Advanced Energy technology as well as initiatives to manage expenses and costs as appropriate for market conditions.

We strongly encourage investors to visit our website: ~~www.boviemedical.com~~www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations

Sales

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Results of Operations~~

~~Sales~~


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2017		2016		Change		2017		2016		Change		2020		2019		Change		2020		2019		Change
Sales by Reportable Segment
Core	$	6,696	$	6,902	(3.0	)%	$	20,959	$	20,261	3.4	%
Advanced Energy													$	2,867	$	5,350	(46.4	)%	$	6,853	$	9,721	(29.5	)%
OEM	525		1,762		(70.2	)%	2,030		4,351		(53.3	)%	1,429		1,299		10.0	%	2,440		2,557		(4.6	)%
Advanced Energy	2,126		1,399		52.0	%	4,546		2,521		80.3	%
Total	$	9,347	$	10,063	(7.1	)%	$	27,535	$	27,133	1.5	%

Sales by Product Line
Electrosurgical	$	6,205	$	5,690	9.1	%	$	17,741	$	15,020	18.1	%
Cauteries	1,696		1,863		(9.0	)%	5,224		5,417		(3.6	)%
Lighting	573		740		(22.6	)%	1,966		2,046		(3.9	)%
Other	873		1,770		(50.7	)%	2,604		4,650		(44.0	)%
Total	$	9,347	$	10,063	(7.1	)%	$	27,535	$	27,133	1.5	%	$	4,296	$	6,649	(35.4	)%	$	9,293	$	12,278	(24.3	)%
																					(632,000)
Sales by Domestic and International
Domestic	$	7,978	$	8,730	(8.6	)%	$	23,678	$	23,102	2.5	%	$	3,393	$	4,540	(25.3	)%	$	7,011	$	8,450	(17.0	)%
International	1,369		1,333		2.7	%	3,857		4,031		(4.3	)%	903		2,109		(57.2	)%	2,282		3,828		(40.4	)%
Total	$	9,347	$	10,063	(7.1	)%	$	27,535	$	27,133	1.5	%	$	4,296	$	6,649	(35.4	)%	$	9,293	$	12,278	(24.3	)%

~~Overall~~Total revenue decreased by (35.4)% and (24.3)%, or approximately $(2.4) million and $(3.0) million, for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019. Advanced Energy segment sales decreased ~~by 7.1%~~(46.4)% and (29.5)%, or approximately ~~$0.7~~$(2.5) million and $(2.9) million, for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019. The impact of COVID-19 resulted in decreased demand for our products, both domestically and internationally in the first half of 2020 as many of our customers' businesses were ordered closed and numerous others temporarily closed voluntarily. Sales began to recover late in the second quarter as many of our customers resumed operations in a limited capacity.

International sales represented approximately 21.0% and 24.6% of total revenues for the three and six months ended June 30, 2020, respectively, as compared with 31.7% and 31.2% of total revenues for the same prior year period. Management estimates our products have been sold in more than 50 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Cost of sales	$	2,202		$	1,975		11.5	%	$	4,215		$	4,041		4.3	%
Percentage of sales	51.3		%	29.7		%			45.4		%	32.9		%



Gross profit	$	2,094		$	4,674		(55.2	)%	$	5,078		$	8,237		(38.4	)%
Percentage of sales	48.7		%	70.3		%			54.6		%	67.1		%	(12.5	)%

Gross profit for the three months ended ~~September~~June 30, ~~2017, when~~2020, decreased (55.2)% year-over-year, to $2.1 million, compared with 2016. Core segment revenue, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, decreased 3.0% or approximately $0.2to $4.7 million in the prior year. Gross margin for the three months ended ~~September~~June 30, ~~2017, when~~2020, was 48.7%, compared ~~with 2016. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 70.2% or approximately $1.2 million~~to 70.3% for the ~~three~~same period in 2019. Gross profit for the six months ended ~~September~~June 30, ~~2017, when~~2020, decreased (38.4)% year-over-year, to $5.1 million, compared ~~with 2016,~~to $8.2 million in the prior year. Gross margin for the six months ended June 30, 2020, was 54.6%, compared to 67.1% for the same period in 2019.

During the second fiscal quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in some of our foreign markets. As a ~~one-time order~~result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. This resulted in a decrease in gross profit of approximately $0.4 million during the ~~comparable period of 2016.~~three and six months ended June 30, 2020. The remaining change in gross profit margins is driven by product mix within both our Advanced Energy and OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our Advanced Energy segment ~~sales were $2.1 million, an increase of approximately 52.0% for the three months ended September 30, 2017, when compared to 2016.~~

~~For the three months ended September 30, 2017, the increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $0.6 million.~~

~~Overall sales increased by 1.5% or approximately $0.4 million for the nine months ended September 30, 2017, when compared with 2016. Core segment revenue, which consists~~as a result of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 3.4% or approximately $0.7 million for the nine months ended September 30, 2017, when compared with 2016. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 53.3% or approximately $2.3 million for the nine months ended September 30, 2017, when compared to 2016, due to a one-time order in the comparable period of 2016. Advanced Energy segment sales were $4.5 million, an increase of approximately 80.3% for the nine months ended September 30, 2017, when compared to 2016.continued manufacturing efficiency initiatives.

~~For the nine months ended September 30, 2017, the increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $2.6 million and accessories of $0.1 million.~~

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Our ten largest customers accounted for approximately 35.3% and 41.3% of trade receivables as of September 30, 2017 and 2016, respectively and approximately 50.0% and 56.9% of net revenues for the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.7% and 9.3% of sales, while for the same period in 2016, McKesson and National Distribution & Contracting Inc. accounted for 15.0% and 9.0% of sales.

During August and September 2017, we were impacted by Hurricanes Harvey in Texas and Irma in Florida. We derive a portion of our revenue from these two states and management believes we were negatively impacted, however we cannot quantify with certainty the amount of the financial impact. There was no significant asset damage at our facility in Clearwater, FL as a result of Hurricane Irma.

~~Gross Profit~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2017 2016 Change 2017 2016 Change
Cost of sales $ 4,753
$ 5,002
(5.0 )% $ 13,673
$ 14,049
(2.7 )%
Percentage of revenue 50.9 % 49.7 %

49.7 % 51.8 %

Gross profit $ 4,594
$ 5,061
(9.2 )% $ 13,862
$ 13,084
5.9 %
Percentage of revenue 49.1 % 50.3 % (1.2 )% 50.3 % 48.2 % 2.1 %

Our gross profit decreased by 9.2% or approximately $0.5 million during the three months ended September 30, 2017 when compared to 2016. Margins were negatively impacted due to a write down of approximately $370,000 for obsolete inventory related to our first generation J-Plasma products that have been substantially upgraded to our current generation. The overall decrease in margins was partially offset by higher margins in the Advanced Energy segment, driven by higher volume and pricing mix on generator sales.

Our gross profit increased by 5.9% or approximately $0.8 million during the nine months ended September 30, 2017 when compared to 2016. The increase was attributed to higher margins in the Advanced Energy segment, driven by higher volume and pricing mix.

~~We do not anticipate any material impact to our gross profit, material costs, or other costs as a result of the effect of inflation or any material impact of changing prices on net revenue.~~

Other Costs and Expenses

Our spending in the three and six months ended June 30, 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of COVID-19, including restrictions on travel. While certain spending decreased in the second quarter of 2020 as a result of a reduction in revenue and activities limited by COVID-19, some of our strategic spending will continue. For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time. Certain costs will decline as the related underlying activities are restricted by COVID-19, including travel, trade shows and related expenses, clinical trials and in-person physician training.

Research and development


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2017			2016			Change		2017			2016			Change		2020			2019			Change		2020			2019			Change
Research and Development expense	$	610		$	681		(10.4	)%	$	2,015		$	1,941		3.8	%	$	975		$	888		9.8	%	$	1,955		$	1,618		20.8	%
Percentage of revenue	6.5		%	6.8		%			7.3		%	7.2		%	0.1	%
Percentage of sales																	22.7		%	13.4		%			21.0		%	13.2		%

~~Bringing new, innovative products to market~~Research and ~~enhancing existing products is a critical component of our strategy. As such, spending in R&D as a percentage of sales was 6.5%~~development expenses increased 9.8% and ~~7.3%~~20.8% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively.~~2020, respectively, primarily due to spending on our two IDE clinical studies, which had applications submitted to the FDA in late 2019.

Professional services



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Professional services expense	$	1,658		$	1,661		(0.2	)%	$	4,047		$	3,779		7.1	%
Percentage of sales	38.6		%	25.0		%			43.5		%	30.8		%

Professional services expense decreased (0.2)% for the three months ended June 30, 2020, primarily attributable to decreases in physician consulting fees ($0.2 million) associated with the COVID-19 shutdown and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020. These decreases were partially offset by an increase in accounting and auditing fees ($0.4 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses.

Professional services expense increased 7.1% for the six months ended June 30, 2020, primarily attributable to an increase in accounting and auditing fees ($0.7 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses. This increase was partially offset by decreases in legal expense ($0.2 million) associated with the class action lawsuit accrual in the first quarter of 2019 and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020.

Salaries and related costs



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Salaries and related expenses	$	3,439		$	3,510		(2.0	)%	$	6,750		$	6,998		(3.5	)%
Percentage of sales	80.1		%	52.8		%			72.6		%	57.0		%

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Professional services~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2017 2016 Change 2017 2016 Change
Professional services expense $ 421
$ 292
44.2 % $ 1,291
$ 1,045
23.4 %
Percentage of revenue 4.5 % 2.9 % 1.6 % 4.7 % 3.9 % 0.8 %

During the three and ~~nine~~six months ended ~~September~~June 30, 2017, professional services expense increased approximately 44.2% and 23.4%, respectively, compared to the prior year. The change was attributable to increases in legal and regulatory consulting expenses related to the Advanced Energy segment.

~~Salaries and related costs~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2017 2016 Change 2017 2016 Change
Salaries and related expenses $ 2,080
$ 2,192
(5.1 )% $ 6,783
$ 6,492
4.5 %
Percentage of revenue 22.3 % 21.8 % 24.6 % 23.9 %

~~During the three months ended September 30, 2017,~~2020, salaries and related expenses decreased approximately ~~5.1% compared to the prior year. The change~~(2.0)% and (3.5)%, respectively, primarily driven by a decrease in accrued bonus expense in 2020. This decrease was ~~attributable to decreases in administrative and personnel expenses,~~ partially offset by ~~increases~~higher stock option expense and an increase in ~~international salary expense.~~average headcount for the period.

During the nine months ended September 30, 2017, salaries and related expenses increased approximately 4.5% or approximately $0.3 million compared to the prior year. The increase was attributable to approximately $0.2 million of incentive compensation and $0.1 million related to administrative, direct sales force and associated management.

Selling, general and administrative expenses


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2017			2016			Change		2017			2016			Change		2020			2019			Change		2020			2019			Change
SG&A Expense	$	2,617		$	2,141		22.2	%	$	7,950		$	6,354		25.1	%	$	2,189		$	3,037		(27.9	)%	$	5,985		$	5,994		(0.2	)%
Percentage of revenue	28.0		%	21.3		%			28.9		%	23.4		%
Percentage of sales																	51.0		%	45.7		%			64.4		%	48.8		%

~~Selling,~~During the three months ended June 30, 2020, selling, general and administrative expense ~~increased~~decreased (27.9)%, primarily driven by ~~22.2% or approximately $0.5 million for~~a decrease in travel and entertainment expense ($0.5 million), a decrease in show fees and related costs ($0.2 million) and a decrease in customer samples ($0.1 million) associated with restricted travel and decreased sales activity from COVID-19.

During the ~~three~~six months ended ~~September~~June 30, ~~2017, when compared to 2016. We experienced increases in sales commissions of $0.3 million and administrative and marketing expense of $0.2 million.~~

~~Selling,~~2020, selling, general and administrative expense ~~increased~~decreased approximately (0.2)%, primarily driven by ~~25.1% or approximately $1.6 million for the nine months ended September 30, 2017, when compared to 2016. We experienced increases~~a decrease in travel and entertainment expense ($0.3 million), a decrease in show fees and related costs ($0.2 million), a decrease in commission expense ($0.2 million) and a decrease in customer samples ($0.2 million) associated with restricted travel and decreased sales ~~commissions of $0.8 million, administrative and regulatory expenses of $0.7 million and marketing of $0.4 million,~~activity from COVID-19. These decreases were partially offset by ~~decreases~~higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from COVID-19 and an increase in ~~trade shows~~insurance premiums ($0.1 million) from the prior year.

Other Income (Expense)



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Interest income	$	7		$	403		(98.3	)%	$	223		$	826		(73.0	)%
Percentage of sales	0.2		%	6.1		%			2.4		%	6.7		%
Other income (losses), net	$	(14	)	$	(200	)	(93.0	)%	$	412		$	(495	)	(183.2	)%
Percentage of sales	(0.3		)%	(3.0		)%			4.4		%	(4.0		)%

Total interest income decreased (98.3)% and ~~general insurance~~(73.0)% for the three and six months ended June 30, 2020, respectively, as compared with the same periods in the prior year. This decrease is due to a lower average balance, as well as a lower yield, on our investments in U.S. Treasury Securities included in cash and cash equivalents.

Other income (losses), net increased for the three and six months ended June 30, 2020, as compared with the prior year. This increase is primarily due to the receipt of ~~$0.3 million.~~refunds on tariffs paid in the prior year, offset by the recognition of a joint and several liability for failure to collect and remit payroll taxes related to stock option exercises in the prior year.

Income Taxes



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Income tax expense (benefit)	$	(1,492	)	$	76		(2,063.2	)%	$	(6,397	)	$	82		(7,901.2	)%
Effective tax rate	24.1		%	(1.8		)%			49.1		%	(0.8		)%

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Other Income (Expense), net~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2017 2016 Change 2017 2016 Change
Interest expense, net $ (36 ) $ (37 ) (2.7 )% $ (103 ) $ (125 ) (17.6 )%
Percentage of revenue (0.4 )% (0.4 )% (0.4 )% (0.5 )%
Change in fair value of derivative liabilities $ (69 ) $ (683 ) (89.9 )% $ 57
$ (555 ) (110.3 )%
Percentage of revenue (0.7 )% (6.8 )% 0.2 % (2.0 )%

~~Interest~~Our income tax (benefit) expense

~~Total net interest expense decreased~~ was approximately $(1,492,000) and $76,000 with an effective tax rate of 24.1% and (1.8)% for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017 as~~2020 and 2019, respectively. Our income tax (benefit) expense was approximately $(6,397,000) and $82,000 with an effective tax rate of 49.1% and (0.8)% for the six months ended June 30, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019. On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses generated in the period 2018 through 2020 to prior years. We released the full valuation allowance of approximately $3.7M on our Federal net operating loss carryforward associated with the provisions of the CARES Act.

Liquidity and Capital Resources

Our working capital at June 30, 2020 was approximately $60.2 million compared with ~~2016,~~$64.4 million at December 31, 2019. The decrease in working capital from December 31, 2019 to June 30, 2020 was primarily due to ~~a decline~~the net loss incurred by the Company during the first half of 2020 partially offset by non cash activity including stock based compensation expense and our provision for allowance for doubtful accounts.

For the six months ended June 30, 2020, net cash used in operating activities was approximately $12.4 million, which principally funded our operating loss of $13.7 million, compared with net cash used in operating activities of approximately $10.7 million million in the ~~mortgage note principal balance.~~

~~Change in fair value of liabilities~~

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants tosame period for 2019. Utilizing the placement agent, of which 94,375 remain outstanding, as of September 30, 2017, and have a strike price of $2.387. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period. At September 30, 2017, the placement agent warrants were valued at $0.1 million and for the nine months ended September 30, 2017, we recognized a non-cash gain of $57,000.

On March 17, 2015, we completed transactions under an exchange agreement (the “Exchange Agreement”) entered into on March 11, 2015 with certain investors (the “Investors”) with respect to which Great Point Partners, LLC acts as investment manager. Pursuant to the termsprovisions of the ~~Exchange Agreement,~~CARES Act, we issued 3,588,139 shares of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in exchange for 3,500,000 shares of our Series A 6% Convertible Preferred Stock and warrants to purchase up to 5,250,000 shares of our common stock in the aggregate which were previously issued in conjunction with the sale of our Series A 6% Convertible Preferred Stock to the Investors in a December 13, 2013 offering, as well as accrued and unpaid preferred dividends. The Series B Preferred Stock issued at that time was convertible into an aggregate of 7,176,298 shares of our common stock, upon the terms set forth in the Certificate of Designation. On September 20, 2017, 975,639 shares of Series B Preferred Stock were converted into 1,951,278 shares of our common stock.

~~Income Taxes~~

~~We recorded~~recognized an income tax ~~expense~~benefit of ~~$6,000~~approximately $6.4 million in the first half of 2020, of which we expect to receive a tax refund of approximately $3.7 million by the end of 2020. We expect that utilizing the NOL carryback will significantly help mitigate the working capital impact COVID-19 has had on our sales and ~~$15,000 during~~operations.

The CARES Act also allows us to defer the ~~three~~payment of payroll taxes incurred between March 27, 2020 and ~~nine months ended September~~December 31, 2020, with half of the resulting liability due on December 31, 2021, and the remainder due on December 31, 2022. As of June 30, ~~2017, respectively.~~2020 we deferred approximately $0.1 million in taxes utilizing this program. We expect to defer and additional $0.3 million to $0.4 million under this program by December 31, 2020.

As a result of the impact of COVID-19 on our customers, we have received multiple requests for extension on the payment of receivables. While we are committed to working with our customers to collect the receivables as expeditiously as possible, collectability of these receivables is more uncertain and we have recorded an increased allowance for doubtful accounts as a result. A ~~valuation allowance is required~~primary focus for the Company in 2020 continues to be ~~provided~~maintaining appropriate balance sheet flexibility, including cash on hand, due to ~~reduce~~ the ~~deferred tax assets to a level which, more likely than not, will be realized. Management evaluated the positive~~uncertain nature and ~~negative evidence in determining the realizability~~unpredictable timing of the ~~net deferred tax asset. In determining~~impacts of COVID-19.

Net cash used in investing activities was $0.2 million, related to investments in property and equipment.

At June 30, 2020, we had purchase commitments totaling approximately $0.5 million, substantially all of which is expected to be purchased within the need for valuation allowance, we reviewed historic operating results, the current period operating results, as well as future income forecasts based on the projections, management concluded that it was not more likely that the Company should realize its net deferred tax assets through future operating results and the reversal of taxable temporary differences. If in the future we determine that we will be able to realize any of the net deferred tax assets, we will make adjustment to the valuation allowance, which would increase our income in the period that the determination is made.next six months.

~~Product Development~~

We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Clearwater, Florida facility and our facility in Sofia, Bulgaria.

2023

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Reliance on Collaborative, Manufacturing and Selling Arrangements~~

We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name and private label. Major distributors include Cardinal Health, Independent Medical Co-Op Inc. (IMCO), McKesson Medical Surgical, Inc., Medline, National Distribution and Contracting Inc. (NDC) and Owens & Minor. If any of these distributor relationships are terminated or not replaced, our revenue from the territories served by these distributors could be adversely affected.

We are also dependent on OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Finally, disagreements or disputes may arise between us and our customers, which could adversely affect production and sales of our products.

We also have collaborative arrangements with three key foreign suppliers under which we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. The majority of our raw materials are purchased from sole-source suppliers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, there are no assurances that we could do so in a timely manner which could render us unable to meet the demands of our customers, resulting in a material and adverse effect on our business and operating results.

~~Liquidity and Capital Resources~~

Our working capital at September 30, 2017 was approximately $17.4 million compared with $21.3 million at December 31, 2016. Accounts receivable days sales outstanding were 40 days and 41 days at September 30, 2017 and 2016, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, increased 1 day to 152 days equating to an inventory turn ratio of 1.92 at September 30, 2017 from 151 days and an inventory turn ratio of 2.30 at September 30, 2016. The lower inventory turn ratio is mainly attributable to an inventory build in support of new, extended and improved product lines.

For the nine months ended September 30, 2017, net cash used in operating activities was approximately $4.4 million compared with net cash used by operating activities of approximately $2.3 million for the same period in 2016. The net cash used in operating activities was attributed to $4.2 million of net loss, increases of inventory of $1.4 million, partially offset by non-cash inflows of $1.2 million.

Net cash used in investing activities was attributed to purchases of property and equipment for approximately $431,000 during the nine months ended September 30, 2017, compared to $182,000 cash used for the same period in 2016.

Cash used in financing activities was approximately $179,000 during the nine months ended September 30, 2017, compared to cash used in financing activities of approximately $1,000 during the same period in 2016.

~~Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at September 30, 2017 was 4.732%.~~

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity of $750,000. Should we desire to extend the Loan beyond July 20, 2019, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0.

~~Approximate future expected principal and interest payments under the Loan agreement are as follows as of September 30, 2017:~~

(In thousands)
2017 (remaining three months)
$ 62
2018 247
2019 2,541
Total $ 2,850

~~At September 30, 2017, we had purchase commitments for inventories totaling approximately $3.6 million, substantially all of which is expected to be purchased by the end of 2017.~~

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~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our ~~report~~Report on Form 10-K for the year ended December 31, ~~2016,~~2019, filed with the Securities and Exchange Commission on March ~~10, 2017.~~31, 2020.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, ~~stock based~~stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:

Stock-based Compensation

Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 and 2020 and the trinomial lattice option-pricing model in prior years, both of which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the expected life and volatility used in the calculations.

Expected life

For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as the we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior.

Volatility

We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. Relevant guidance allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.

Accounts Receivable Reserves

We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inventory ~~reserves~~Reserves

We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.

~~Long-lived assets~~Litigation Contingencies

~~We review long-lived assets which are held~~In accordance with authoritative guidance, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and ~~used, including property~~the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and ~~equipment and intangible assets, for impairment whenever changes in circumstances indicate that~~no amount within the ~~carrying~~range is a better estimate than any other, the minimum amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast.range is accrued. If ~~the asset~~a loss is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

~~Derivative liabilities valued at fair value~~

We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, certain financial instruments, such as warrants, which are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded and continuously carried, at fair value.

~~Determining the fair value of these instruments involves judgment and the use of certain relevant assumptions including,~~reasonably possible, but not ~~limited to, interest rate risk, historical volatility~~known or probable, and ~~stock price,~~can be reasonably estimated, ~~life of the derivative, anti-dilution provisions and conversion/redemption privileges. The use of different assumptions or changes in those assumptions could have a material effect on~~ the estimated ~~fair value amounts.~~

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

~~Stock-based Compensation~~

Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, ~~Compensation-Stock Compensation~~, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.

~~Litigation Contingencies~~

From time to time, we are exposed to claims and litigation arising in the ordinary course of business or otherwise and use various methods to resolve these matters in a manner that we believe serves the best interest of the Company and our stockholders. There can be no assurance these actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified claims or litigation matters will have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or ~~possible~~ range of loss ~~associated with~~is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded; actual results may differ from these ~~contingencies, then we would record the minimum estimated liability, which could materially impact our results of operations, financial position and cash flows.~~estimates.

Income Taxes

The provision for income ~~taxes~~tax expense (benefit) includes federal, foreign, state and local income taxes currently payable or receivable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.

As a result of historical losses exclusive of the sale of the Core business in 2018, and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on the net deferred tax asset and do not anticipate recording an income tax benefit related to these deferred tax assets. We have net operating loss and tax credit carry forwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating loss and tax credit carry forwards are recognized towill reassess the ~~extent that~~ realization of ~~these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various~~deferred tax ~~business~~assets each reporting period and ~~other planning strategies will enable us to utilize the operating loss and tax credit carry forwards. We cannot be assured that we~~ will be able to ~~realize these~~reduce the valuation allowance to the extent the financial results improve and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in 2020 and the foreseeable future after 2020, we will continue to record a valuation allowance on the remaining deferred tax ~~benefits~~asset balance as of June 30, 2020.

We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that ~~future valuation allowances~~is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be ~~required. To~~recognized in the ~~extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.~~

~~It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit~~financial statements unless it is more likely than not ~~to be sustained upon examination by tax authorities. To the extent that the probable tax outcome~~ of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. At September 30, 2017, we believe we have appropriately accounted for any unrecognized tax positions. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.being sustained.

Since inception, we have been subject to tax by both federal and state taxing authorities. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused NOL’s), we are subject to income tax audits in the jurisdictions in which we operate.

Inflation

Inflation has not materially impacted the operations of our Company.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements at this time.

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

Recent Accounting Pronouncements

See Note 43 of the Notes to Consolidated Financial Statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For our disclosures about market risk, please see Part II, Item 7A., "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended December 31, 2016. We believe there have been no material changes to the information provided therein.Not applicable.

ITEM 4. Controls and Procedures

~~Evaluation of~~ Disclosure Controls and Procedures

~~We have carried out an evaluation, under the supervision of~~Our management has established and ~~with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our~~maintains disclosure controls and procedures ~~(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of September 30, 2017. Based upon~~ that ~~evaluation, our CEO and CFO concluded~~are designed to ensure that ~~as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a)~~ the information required to be disclosed by us in ~~the~~ reports that we ~~filed~~file or ~~submitted~~submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s~~Securities and Exchange Commission's rules and forms, and ~~(b)~~that such information is accumulated and communicated to ~~our~~ management, including ~~our CEO~~the Chief Executive Officer and ~~CFO,~~Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. ~~In designing~~Management carried out an evaluation, under the supervision and ~~evaluating~~with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our ~~management recognized~~Chief Executive Officer and Chief Financial Officer have concluded that, ~~any~~as of June 30, 2020, due to the material weaknesses in our internal control over financial reporting previously identified and reported in our 2019 Annual Report on Form 10-K ("2019 Form 10-K") which, as described below, continue to exist, our disclosure controls and procedures ~~no matter how well~~were not effective.

Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed ~~and operated, can~~to provide ~~only~~ reasonable assurance regarding the reliability of ~~achieving~~financial reporting and the ~~desired~~preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control ~~objectives~~over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management ~~necessarily~~carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control- Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2019, the Company's internal control over financial reporting was ~~required~~not effective as a result of the material weaknesses described below.

The effectiveness of our internal control over financial reporting as of December 31, 2019 was audited by BDO USA LLP, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2019, contains an adverse opinion on the effectiveness of our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.


•	As of December 31, 2019 we had identified the following three material weaknesses:An ineffective control environment requiring additional qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles. This was a deficiency from the prior year that had not been fully

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remediated.

Ineffective control activities due to ~~apply its judgment~~the lack of documentation and timeliness in ~~evaluating~~executing certain business process controls, specifically related to procure to pay and inventory processes and footnote reporting disclosures related to income tax accounts, primarily related to our United States operations. This was a deficiency from the ~~cost-benefit relationship~~prior year that had not been fully remediated.

Ineffective control activities over financial reporting in our Bulgarian subsidiary related to the purchasing of ~~possible~~goods and services, including the processing and payment of vendor invoices.

As of June 30, 2020, we continue our remediation efforts related to these deficiencies.

Remediation Efforts to Address Material Weaknesses

Management is committed to maintaining a strong internal control environment. In response to the identified material weaknesses, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions toward the remediation of the respective material weaknesses in internal control over financial reporting as outlined below.

We are in the process of remediating the material weakness associated with the lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles by hiring a new Chief Financial Officer in January 2019 and, in September 2019, a new Corporate Controller with experience in internal controls and ~~procedures.~~financial reporting. Both have been actively engaged in remediation efforts to address the material weaknesses to date and will continue throughout fiscal year 2020. We will continue to recruit qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting issues related to non-routine and complex transactions. We have also enhanced our policies, procedures, and controls for all key business processes. In addition, management will continue to train personnel to ensure consistent application of accounting principles and adherence to the Company’s policies, procedures, and controls.

We are in the process of remediating the material weakness associated with the ineffective control activities due to the lack of documentation and timeliness in executing business process controls by enhancing our processes and review controls associated with the processes noted above. We have reviewed current financial controls to assess if additional management review controls are necessary and will continue to work with all finance personnel to ensure the appropriate documentation criteria for the existing controls, including evidence of review, timeliness and variance thresholds. We will continue to work with the third-party specialists we engaged to review, document, and enhance the design of our controls, with the goal of designing and implementing controls that address the completeness and accuracy of data used in the performance of certain controls as well as the precision of management's review, but also enhance our ability to manage our business.

We have enhanced, or are in the process of enhancing, certain controls over purchasing and disbursements in our Bulgarian subsidiary, including approving and validating vendor invoices received by verifying the related purchase authorization and the receipt of the goods or services.

Management believes the steps outlined above, along with the implementation of a new financial reporting system, will remediate the material weaknesses described above. The Audit Committee of the Board of Directors and management will continue to monitor the implementation of these remediation measures and the effectiveness of our internal controls over financial reporting on an ongoing basis.

As of June 30, 2020, our remediation of these deficiencies is incomplete.

Changes in Internal Control ~~over~~Over Financial Reporting

~~There~~Except as set forth above, there were no changes in our internal control over financial reporting ~~(as defined in Rules 13(a)-15(f) and 15(d)-15(f))~~that occurred during the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2020 that ~~have~~ materially affected, or that are reasonably likely to materially affect our internal control over financial reporting.

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~~BOVIE~~APYX MEDICAL CORPORATION

PART II. Other Information

ITEM 1. Legal Proceedings

~~From time to time, we are exposed to~~The medical device industry is characterized by frequent claims and litigation, ~~arising~~and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of ~~business~~our business. Such claims may include claims by current or ~~otherwise~~former employees, distributors and ~~use various methods to resolve these matters~~competitors, claims concerning the marketing and promotion of our products and product liability claims.

We are involved in a ~~manner~~number of legal actions relating to the use of our Helium Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policies or if our insurance carriers disclaim coverage, we believe ~~serves the best interest of the Company and our stockholders. There can be no assurance~~it is possible that costs associated with these ~~actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified~~ claims ~~or litigation matters will~~could have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or possible range of loss associated with these contingencies, then we would record the minimum estimated liability, which could materially impact ourconsolidated results of operations, financial position ~~and~~or cash flows.

On April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida, against the Company and Charles D. Goodwin, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On September 3, 2019, lead plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.

The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019, and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. On October 3, 2019, defendants filed a motion to dismiss the Amended Complaint, and on March 11, 2020, the Court denied that motion. On July 10, 2020, the parties executed a settlement agreement, which is subject to Court approval. The Court preliminarily approved the settlement on July 21, 2020. The settlement agreement provides for the dismissal of the action with prejudice. At June 30, 2020, approximately $670,000 of the $1,000,000 insurance deductible is unpaid and is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet. During July 2020, substantially all of the unpaid deductible was paid.

We ~~expense costs~~accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of ~~litigation related to contingencies~~a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the ~~periods in which~~notes to the ~~costs are incurred.~~consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.

ITEM 1A. Risk factors

There have been no material changes to the ~~risk factors previously disclosed~~Risk Factors described in Part I, Item1A-Risk Factors in our ~~Form 10-K~~annual report on Form10-K for the year ended December 31, ~~2016,~~2019 other than the following:

THE COVID-19 Pandemic has had and continues to have a material and adverse affect on our business

Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of COVID-19. To date, COVID-19 has had, and may continue to have, a material and adverse impact on our operations. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as actions taken by governmental bodies have restricted our customers' business activities. There continues to be a significant amount of uncertainty as to when these restrictions will be lifted and when patients will choose to undergo the elective procedures provided by our customers. While many of our customers have begun to

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experience positive trends in these restrictions being lifted and some patients have started elective procedures again, there is no guarantee that restrictions won't be reinstated or that patients will not choose to forgo elective procedures. In addition, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to ~~Item 1A~~continued economic disruption related to ~~Part 1~~COVID-19.

As a result of ~~Form 10-K.~~the COVID-19 outbreak, many businesses experienced temporary closures of facilities as a result of being considered non-essential businesses. As performers of elective procedures, these temporary closures have impacted many of our customers and materially reduced demand for our products. As a medical device company, while we have currently been exempt from these guidelines and have largely continued operations, if we continue to experience future materially reduced demand for our products, we may have to scale back our operations. In addition, if the guidelines change, we or our suppliers could be impacted, and we could be adversely affected through supply chain interruptions, manufacturing restrictions or labor restrictions.

In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the world economy and financial markets , which has resulted in a period of significant global economic slowdown which has curtailed and delayed spending by physicians and affected demand for our products as well as increased risk of customer defaults or delays in payments. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows. Due to the uncertain scope and duration of the pandemic, the and uncertain timing of global recovery and economic normalization, we are unable to estimate the impacts on our operations and financial results, but believe they will be material into the second quarter of 2020 and possibly beyond.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.

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~~BOVIE~~APYX MEDICAL CORPORATION

ITEM 6. Exhibits



3.1		Articles of Incorporation of the Registrant (Incorporated by reference to the Registrant’s report on Form 10-K/A filed on March 31, 2011)
3.2		By laws of the Registrant (Incorporated by reference to the Registrant’s ~~report~~Annual Report on Form 10-K/A filed on March 31, 2011)
3.3		Certificate of Designation of Preferences, Rights and Limitations of Series A 6% Convertible Preferred Stock of Bovie Medical Corporation (Incorporated by reference to the Registrant’s report on Form 8-K filed December 16, 2013)
~~3.4~~		~~Certificate of Designation of Series B Preferred Stock (Incorporated by reference to Exhibit 3.1 on Form 8-K filed on March 11, 2015.~~
3.5*		Certificate of Amendment of the Certificate of Incorporation of the ~~Registrant.~~Registrant (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 3, 2017).
3.4		Certificate of Elimination (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 3, 2018)
3.5		Certificate of Amendment of the Certificate of Incorporation of the Registrant (Incorporated by reference to the Registrant's Current Report of Form 8-K filed on December 28, 2018)
31.1*		Certification pursuant to Section 302 of Sarbanes-Oxley Act of 202
31.2*		Certification pursuant to Section 302 of Sarbanes-Oxley Act of 202
32.1*		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 202
32.2*		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 202
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Label Presentation Document

* Filed herewith.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.

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~~BOVIE~~APYX MEDICAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	~~Bovie~~Apyx Medical Corporation

Date: ~~November 3, 2017~~August 10, 2020	By:	/s/ ~~Robert L. Gershon~~Charles D. Goodwin II
		~~Robert L. Gershon~~Charles D. Goodwin II
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date: ~~November 3, 2017~~August 10, 2020	By:	/s/ ~~Jay D. Ewers~~Tara Semb
		~~Jay D. Ewers~~Tara Semb
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer)

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	September 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	9,411		$	14,456
Restricted cash	779			779
Trade accounts receivable, net of allowance of $154 and $118	4,077			4,733
Inventories, net	7,335			6,158
Prepaid expenses and other current assets	634			413
Total current assets	22,236			26,539
Property and equipment, net	6,376			6,449
Brand name and trademark	1,510			1,510
Purchased technology and license rights, net	189			215
Goodwill	185			185
Deposits	84			109
Other assets	119			103
Total assets	$	30,699		$	35,110

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,387		$	1,606
Accrued payroll	193			419
Accrued vacation	330			404
Current portion of mortgage note payable	239			239
Accrued and other liabilities	2,657			2,604
Total current liabilities	4,806			5,272
Mortgage note payable, net of current portion	2,515			2,694
Note payable	140			140
Deferred rents	11			14
Deferred tax liability	564			564
Derivative liabilities	146			203
Total liabilities	8,182			8,887
STOCKHOLDERS' EQUITY
Series B convertible preferred stock, $0.001 par value; 3,588,139 authorized and zero issued and outstanding as of September 30, 2017 and 3,588,139 authorized and 975,639 issued and outstanding as of December 31, 2016, respectively	—			1
Common stock, $0.001 par value; 75,000,000 shares authorized; 32,975,174 issued and 32,832,095 outstanding as of September 30, 2017 and 40,000,000 shares authorized; 31,002,832 issued and 30,859,753 outstanding as of December 31, 2016, respectively	33			31
Additional paid-in capital	50,156			49,625
Accumulated deficit	(27,672		)	(23,434		)
Total stockholders' equity	22,517			26,223
Total liabilities and stockholders' equity	$	30,699		$	35,110



	Preferred Stock					Common Stock
	Shares		Par Value			Shares		Par Value		Additional Paid-In Capital			Accumulated Deficit			Total
Balance December 31, 2015	1,976		$	2		27,051		$	27	$	42,859		$	(19,484	)	$	23,404
Options exercised	—		—			31		—		119			—			119
Warrants exercised	—		—			133		—		316			—			316
Stock based compensation	—		—			—		—		533			—			533
Stock swap to acquire options and warrants	—		—			(73	)	—		(315		)	—			(315		)
Net loss	—		—			—		—		—			(3,428		)	(3,428		)
Balance September 30, 2016	1,976		$	2		27,142		$	27	$	43,512		$	(22,912	)	$	20,629

Balance December 31, 2016	976		$	1		30,860		$	31	$	49,625		$	(23,434	)	$	26,223
Options exercised	—		—			21		—		275			—			275
Conversion of Series B convertible preferred to common stock	(976	)	(1		)	1,951		2		(1		)	—			—
Stock based compensation	—		—			—		—		532			—			532
Stock swap to acquire options and warrants	—		—			—		—		(275		)	—			(275		)
Net loss	—		—			—		—		—			(4,238		)	(4,238		)
Balance September 30, 2017	—		$	—		32,832		$	33	$	50,156		$	(27,672	)	$	22,517



	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities
Net loss	$	(4,238	)	$	(3,428	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	527			556
Provision for inventory obsolescence	203			365
Gain on disposal of property and equipment, net	3			19
Stock based compensation	532			533
Change in fair value of derivative liabilities	(57		)	555
Provision for allowance for doubtful accounts	128			126
Provision for deferred taxes	—			25
Changes in current assets and liabilities:
Trade receivables	528			(1,070		)
Prepaid expenses	(221		)	(48		)
Inventories	(1,380		)	(337		)
Deposits and other assets	9			312
Accounts payable	(219		)	436
Accrued and other liabilities	(250		)	(337		)
Net cash used in operating activities	(4,435		)	(2,293		)
Cash flows from investing activities
Purchases of technology, property and equipment	(431		)	(182		)
Net cash used in investing activities	(431		)	(182		)
Cash flows from financing activities
Proceeds from stock options/warrants exercised	—			119
Change in restricted cash	—			60
Repayment of mortgage note payable	(179		)	(180		)
Net cash used in financing activities	(179		)	(1		)
Net change in cash and cash equivalents	(5,045		)	(2,476		)
Cash and cash equivalents, beginning of period	14,456			11,805
Cash and cash equivalents, end of period	$	9,411		$	9,329

Cash paid for:
Interest paid	$	103		$	125



(in thousands)	2013 Placement Agent Warrants
Balance, December 31, 2016	$	203
Change in fair value	(57		)
Balance, September 30, 2017 ⁽¹⁾	$	146



	Number of options		Weighted average exercise price
Outstanding at December 31, 2016	3,752,209		$	3.04
Granted	628,000		3.26
Exercised	(104,500	)	2.64
Canceled and forfeited	(196,803	)	4.99
Outstanding at September 30, 2017	4,078,906		$	2.99



	2017 Grants
Option value	$	1.73	-	$	2.34
Risk-free rate	1.5%
Expected dividend yield	—%
Expected volatility	68.0%
Expected term (in years)	6



(In thousands)
2017 (remaining three months)	$	47
2018	189
2019	132
2020	73
2021	73
Total	$	514



(In thousands)	Long-term debt
2017 (remaining three months)	$	60
2018	239
2019	2,455
Total	$	2,754



	Three Months Ended September 30, 2017
(In thousands)	Core		OEM		Advanced Energy			Corporate (Other)			Total
Sales	$	6,696	$	525	$	2,126		$	—		$	9,347

Income (loss) from operations ⁽¹⁾	1,699		323		(718		)	(2,438		)	(1,134		)

Interest expense, net	—		—		—			(36		)	(36		)
Change in fair value of derivative liabilities	—		—		—			(69		)	(69		)
Income tax expense	—		—		—			6			6
Depreciation and amortization	—		—		—			171			171



	Three Months Ended September 30, 2016
(In thousands)	Core		OEM		Advanced Energy			Corporate (Other)			Total
Sales	$	6,902	$	1,762	$	1,399		$	—		$	10,063

Income (loss) from operations	2,089		690		(707		)	(2,317		)	(245		)

Interest expense, net	—		—		—			(37		)	(37		)
Change in fair value of derivative liabilities	—		—		—			(683		)	(683		)
Income tax expense	—		—		—			—			—
Depreciation and amortization	—		—		—			201			201



	Nine Months Ended September 30, 2017
(In thousands)	Core		OEM		Advanced Energy			Corporate (Other)			Total
Sales	$	20,959	$	2,030	$	4,546		$	—		$	27,535

Income (loss) from operations ⁽¹⁾	6,471		1,031		(3,821		)	(7,858		)	(4,177		)

Interest expense, net	—		—		—			(103		)	(103		)
Change in fair value of derivative liabilities	—		—		—			57			57
Income tax expense	—		—		—			15			15
Depreciation and amortization	—		—		—			527			527



	Nine Months Ended September 30, 2016
(In thousands)	Core		OEM		Advanced Energy			Corporate (Other)			Total
Sales	$	20,261	$	4,351	$	2,521		$	—		$	27,133

Income (loss) from operations	5,047		2,498		(3,331		)	(6,962		)	(2,748		)

Interest expense, net	—		—		—			(125		)	(125		)
Change in fair value of derivative liabilities	—		—		—			(555		)	(555		)
Income tax expense	—		—		—			—			—
Depreciation and amortization	—		—		—			355			556